The impact of China’s new critical mineral export controls

China recognised the strategic importance of its rare earths industry back in the early 1990s. Deng Xiaoping, the former leader, said in 1992: “The Middle East has its oil, China has rare earths… it is of extremely important strategic significance.” That strategic vision is still paying off today.

In an escalation of the trade dispute between China and the US, Beijing last week moved to tighten export controls for rare earths and other critical minerals and technologies, particularly for batteries. Its dominance of global supply chains for those materials means that its moves could have far-reaching impacts on industries including defence and semiconductors, as well as battery storage and electric vehicles.

The package of measures includes new controls on five rare earth elements that are crucial in medical and telecoms applications, as well as some military uses. And while previous controls on rare earths focused primarily on materials, the latest restrictions also cover components such as magnets, and equipment for recycling.

The battery-related controls are even more wide-ranging, covering cathode and anode materials, high-performance components, and manufacturing equipment.

President Donald Trump responded swiftly, saying the US would impose additional tariffs of 100% on all imports from China on 1 November. Over the weekend, however, he stepped back from that confrontational stance, posting: “Don’t worry about China, it will all be fine!... The USA wants to help China, not hurt it!!!” Stock markets, which had fallen sharply on Friday, rebounded on Monday.

Under successive administrations, the US has been taking measures to develop alternative sources of supply for rare earths and battery materials. Chris Wright, the energy secretary, in August announced nearly US$1 billion of funding opportunities for projects to develop and scale up mining, processing, and manufacturing technologies for critical minerals.

The Department of Defense has also been stepping up its purchases of critical minerals, with recent orders worth a total of more than US$1 billion for cobalt, antimony, tantalum and scandium, among other materials.

Some moves to secure US domestic supplies are already under way. The Department of Defense in July agreed a deal to support MP Materials, which owns the Mountain Pass rare earths mine in California, processing facilities, and manufacturing plants for metals and magnets.

The US government made investments that would make it the company’s largest shareholder, agreed to buy all the magnets produced at MP’s new factory for at least ten years, and set a guaranteed price floor for its rare earth products.

The Trump administration also took 5% stakes in Lithium Americas and in the Thacker Pass lithium mine in Nevada that the company is developing in a joint venture with General Motors.

The private sector has also been stepping up. JPMorgan on Monday launched what it described as a US$1.5 trillion security and resiliency initiative: a 10-year plan to facilitate, finance and invest in key strategic industries, including critical minerals.

China’s latest moves have been widely seen as a negotiating tactic, intended to create leverage before President Trump meets President Xi Jinping at the Asia-Pacific Economic Cooperation summit in South Korea at the end of October. If a deal can be done there, the new restrictions may be lifted quickly.

Scott Bessent, the US Treasury secretary, said on Monday that there had been substantial communication between the two countries over the weekend, and the US had “de-escalated” the situation.

However, he suggested that the dispute underlined the importance of reducing US dependence on China.

“We don’t want to decouple. But China, when they send out messages like this, this is a decoupling message,” he said.

The Wood Mackenzie view

The first thing everyone learns about rare earths is that they are not actually particularly rare, in terms of their distribution of deposits around the world. The same is true of many other critical minerals: lithium, for example. But that does not mean that diversifying away from Chinese supplies will be easy.

China dominates global supply chains for these materials not because it holds the largest resource base for primary supplies, but because it has invested in technologies and capacity to process, refine and use them.

“China has been working consistently on these critical minerals for many decades,” says Julian Kettle, Wood Mackenzie’s Vice-Chairman of Metals and Mining. “The industry had a lot of failures, but they learned from them. They kept trying and trying again.”

In the US and other developed economies, minerals processing capacity has been lost and knowhow dispersed when companies were hit by downturns in the market. In China, these sectors have benefitted from consistent government support.

In the developed world, environmental regulations and community opposition have made it difficult and expensive to expand operations. In China, environmental regulations have still allowed industries to grow.

Creating the right economic, political and social framework to allow critical minerals companies to invest and expand in developed countries will take time and money. The US deal with MP Materials is a step in the right direction, but more will be needed to develop complete supply chains in all the relevant sectors.

Perhaps the toughest point for other countries to accept is that China has much of the world’s best technology and capabilities for materials processing. “It’s quite a sobering moment for the West to have to go to China to say: ‘can you show us how to it?’ But in many sectors that’s the reality,” says Wood Mackenzie’s Kettle.

“If other countries want best-in-class technology, they are going to have to work with Chinese companies.”

However, the Trump administration and other US politicians are generally deeply sceptical about partnerships between American and Chinese companies. Japanese and South Korean companies also have materials processing capabilities, but have faced challenges with investment in the US.

If China’s latest export restrictions are maintained, they will also make it harder to build alternative supply chains in other countries. The details vary from product to product, but in general, delayed approvals for equipment exports will slow the commissioning of non-Chinese plants.

Secretary Bessent says the US drive to establish its own critical minerals industry is “the equivalent of Operation Warp Speed”: the first Trump administration’s highly successful programme to develop vaccines for Covid-19.

The US is unlikely to be able to establish full supply chains for rare earths and battery raw materials that quickly. But unless it and other countries start to make the effort, critical minerals will continue to represent important strategic leverage for China.

A setback for the largest solar project in North America

The Trump administration has blocked what would have been the largest solar development in North America: the 6.2 gigawatt Esmeralda Seven project in Nevada. A statement on the Bureau of Land Management (BLM) website described the project, which would have covered about 62,300 acres, as “cancelled”. However, there are signs that one or more of the project’s seven phases could still go ahead.

The Department of the Interior said in a statement that the developers, which include NextEra and Invenergy, could still “submit individual project proposals to the BLM to more effectively analyse potential impacts” of individual phases.

The BLM suggested that it could “consider authorising an amendment” to the resource management plan for the area to allow solar installations. It added that the Environmental Impact Statement for the plan should “further analyse generally the expected impacts [from the project] and develop required future mitigation.”

NextEra said it remained “committed to pursuing our project’s comprehensive environmental analysis by working closely with the Bureau of Land Management.”

In brief

Oil prices have dropped to their lowest levels since May, on fears that the flare-up in trade tensions between China and the US could hit global growth. Brent crude was trading at about US$63.40 a barrel on Monday night.

Ming Yang of China plans to invest £1.5bn in Scotland to build the UK’s largest wind turbine manufacturing plant. The company’s UK chief executive said it aimed to “make this country the global hub for offshore wind technology.”

Other views

How data centre growth is driving up US power prices – Simon Flowers, Chris Seiple and Ben Hertz-Shargel

Peak season pressures reshape US power markets as capacity constraints drive price volatility – Tien Tong and Cole Kroninger

US shale gas is back: new demand signals underpin upstream opportunity – Ryan Duman and Lydia Walker

China claims 70-90% cost advantage in power plant carbon capture as European projects face costs approaching US$300 per tonne

Flight path to net zero: aviation’s fuel outlook to 2050 – Ozzy Jegunma and others

Why China built 162 square miles of solar panels on the world’s highest plateau

Quote of the week

“These data centers should be outfitted with power generation capabilities, whether it’s natural gas or in the future – several years from now – nuclear. We should invest in just about every possible way of generating energy. And then even put it back onto the grid. And so that’s the future. And data center self-generated power could move a lot faster than putting it on the grid.”

Jensen Huang, chief executive of Nvidia, talked in an interview on CNBC about the importance of data centres having behind-the-meter power, to accelerate deployment and stop driving up electricity bills for other customers.

Chart of the week

This comes from our recent note titled US shale gas is back, by Ryan Duman and Lydia Walker. It makes a very simple point: through the 2010s, rising natural gas supply in the US was associated with a declining trend in prices. But now, from the second half of the 2020s, it seems likely that rising supply will be associated with rising prices.

That only scratches the surface of the argument, though. There is a whole lot more analysis and data to support the thesis and provide context and nuance, available if you download the full report.

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